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Precautionary Savings or Working Longer Hours?

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  • Josep Pijoan-Mas

    (CEMFI)

Abstract

This paper quantifies the macroeconomic implications of the lack of insurance against idiosyncratic labor market risk. I show that in a model economy calibrated to observed individual level data, households make ample use of work effort as a consumption smoothing mechanism. As a consequence, aggregate consumption is 0.6% lower, work effort is 18% higher and labor productivity is 12% lower than they would be in a complete markets setting. Not surprisingly, the welfare benefits of moving towards complete markets are very large. Accounting for the whole transition to the new complete markets steady state I find the welfare costs of market incompleteness above 16% of individual lifetime consumption. (Copyright: Elsevier)

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File URL: http://dx.doi.org/10.1016/j.red.2005.11.002
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 9 (2006)
Issue (Month): 2 (April)
Pages: 326-352

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Handle: RePEc:red:issued:v:9:y:2006:i:2:p:326-352

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Keywords: Incomplete Markets; Labor Supply; Precautionary Savings;

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